Condominium Oversupply

Miami as a Second Home Resort Market

February 9, 2005

Supply & Demand

• Miami is an overbuilt market

• There are 10,000 to 20,000 luxury priced units in the pipeline

• Land Prices at Record Levels <$300SF

Interest Rates

• Now Increasing

• Budget deficit at record levels

• High trade deficit

• Weak dollar

Prime vs 30yr fixed

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2/2

/2004

3/2

/2004

4/2

/2004

5/2

/2004

6/2

/2004

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/2004

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/2004

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/2004

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/2004

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/2004

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/2005

2/2

/2005

Date

Perc

en

tag

ePrime Rate 30yr Mortgage

Housing Market Still Hot, Due For Leveling

Median Home Prices

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

Miami-Dade Broward West PalmBeach

U.S.

1990-2003 3Q2004

Sources: Marcus & Millichap Research Services, Economy.com

64% 65%91%

23%

2001 – 3Q 2004 Price Increase

Med

ian

Hom

e P

rice

South Florida Housing Cost Comparison

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Miami-Dade Broward West Palm Beach

Median Mortgage Payment Average Class A Rent

Average Class B/C Rent

Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

South Florida Apartment Rent Trends

$200

$400

$600

$800

$1,000

$1,200

Miami-Dade Broward West Palm Beach

1999-2002 2004* 2005*

*Forecast

Sources: Marcus & Millichap Research Services, Reis.

2001-2005* Rent

Increase

11% 8% 8%

Year Absorption Completion Starts Vacant1985 1,007 1,216 2,559 1,3381986 2,946 4,022 6,531 2,4141987 5,930 6,387 4,769 2,8711988 4,487 3,902 3,891 2,2861989 3,305 2,499 2,102 1,6071990 4,424 3,919 1,824 1,0681991 3,313 2,228 1,385 3961992 1,206 832 495 121993 1,241 1,246 1,734 171994 873 902 2,301 701995 2,367 2,873 1,926 5761996 1,373 1,011 1,268 2141997 1,105 1,140 1,977 3111998 1,416 1,506 2,511 4011999 1,139 858 1,183 1202000 2,404 2,341 3,878 572001 1,245 1,980 1,697 7542002 2,094 2,548 3,544 1,2102003 3,202 2,392 4,372 779

2004-3 2,206 2,047 555 690

Source: Reinhold P. Wolff Economic Reasearch, Inc. 1985-2004/3

DEVELOPMENT TREND OF NEW APARTMENTSMIAMI-DADE COUNTY

Total $150,000 $175,000 $250,000 + $175,000 % $150,000 %$174,999 $249,999 $449,999 $450,000 +$450,000 County +$450000 County

1Q 753 29 44 68 98 210 27.89% 239 31.74%2 Q 632 14 28 81 126 235 37.18% 249 39.40%3 Q 811 10 47 112 51 210 25.89% 220 27.13%4 Q 883 89 118 136 46 300 33.98% 389 44.05%

3,079 142 237 397 321 955 31.02% 1,097 35.63%

1Q 612 18 29 66 51 146 23.86% 164 26.80%2 Q 813 37 101 158 52 311 38.25% 348 42.80%3 Q 665 33 67 94 97 258 38.80% 291 43.76%4 Q 1,640 77 269 329 284 882 53.78% 959 58.48%

3,730 165 466 647 484 1,597 42.82% 1,762 47.24%

1Q 1,490 45 146 282 406 834 55.97% 879 58.99%2 Q 1,077 54 84 188 202 474 44.01% 528 49.03%3 Q 1,062 80 105 115 163 383 36.06% 463 43.60%4 Q 1,124 97 99 208 84 391 34.79% 488 43.42%

4,753 276 434 793 855 2,082 43.80% 2,358 49.61%

1Q 1,149 56 93 256 215 564 49.09% 620 53.96%2 Q 1,418 123 152 289 235 676 47.67% 799 56.35%3 Q 1,397 178 176 214 376 766 54.83% 944 67.57%4 Q 1,917 270 320 168 389 877 45.75% 1,147 59.83%

5,881 627 741 927 1215 2,883 49.02% 3,510 59.68%

$175,000 $250,000 $175,000 %$249,999 $499,999 +$500,000 +$500,000 County

1Q 1,512 159 231 272 147 650 42.99% 809 53.51%2 Q 2,038 215 355 401 130 886 43.47% 1,101 54.02%3 Q 1,780 265 274 525 160 959 53.88% 1,224 68.76%4 Q - #DIV/0! -

5,330 639 860 1198 437 2,495 46.81% 3,134 58.80%

32,986 13,602 41.24% 15,866 48.10%Annual Avg. 4,256 1,755 41.24% 2,047 48.10%(1997-2004/3)

Source: Reinhold P. Wolff Economic Research, Inc. Note: *From 2004 range varied

20

02

20

03

20

04

Total (97-04)

20

00

20

01

YearDADE COUNTY

New Condominium Prices

Unit Price

Price $600,000

Down payment 20% $120,000

Mortgage $480,000

Monthly Payment $2,878 

$34,536 Annual Payment

Taxes $13,161

Insurance $649

Yearly Payment $48,346

Yearly Income $161,153

30 % of annual income

30 yrs, 6%

1,500 SF$400 SF

Construction Costs

• Increasing above inflation rate

• New construction loans are participated to reduce exposure

Developer buys Miami waterfront hotel for $94 million• By Matthew Haggman, The Miami Herald

Knight Ridder/Tribune Business News • Dec. 14--Developer Jorge Perez has paid $94 million for the waterfront Sheraton Biscayne

Bay hotel on Brickell Avenue, which he plans to demolish to make way for a mixed-use project that will include high-rise condominium towers.

• The 598-room hotel will stay open for at least six months while plans for the project are developed, said Perez, chairman of Miami-based Related Group of Florida.

• The Sheraton will continue to manage the property, he added. • The 5.1-acre property at 495 Brickell Ave. stretches to Biscayne Bay. The sale price is the

highest total price Perez has ever paid for land. • Flanking the hotel are the Miami Circle, a protected Tequesta Indian site, and the 2.2-acre

Brickell Park. • Springfield, Mass.-based MassMutual Financial Group sold the property to Perez. • Manuel de Zarraga, executive managing director of Holliday Fenoglio Fowler in Coral Gables, led

the team that brokered the sale, which closed Friday. • (c) 2004, The Miami Herald. Distributed by Knight Ridder/Tribune Business News. For

information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail reprints@krtinfo.com. HOT,

Physical Market Cycle CharacteristicsPhysical Market Cycle Characteristics

Below Inflation & Negative Sales Price

Growth

Negative Sales Price Growth

Below Inflation Sales Price Growth

Increasing Sales Prices Tight Market

Sales Price Increases in Decline

Sales price growth above inflation

The Role of Research In Identifying Cycles in Real Estate

• Demand for Space Increases

• Rents Rise Faster than Expenses

• NOI spike Attracts Capital

• Over Building Reduces Occupancy

• High Vacancy Reduces Rents

• Lower Income Leads to Reduced Prices

Valuation Considerations

• Business cycle• Inflation or deflation• Interest rates and credit• Population demographics• Tastes and preferences• Regional economic base• Construction costs• Legal and regulatory

environment• Taxes

• Physical characteristics of property

• Location• Legal• Nature of leases• Financing

Valuation Considerations

Return

• Purchase price or cost

• Price appreciation

• Leverage

• Inflation hedge

Risk• Liquidity and

marketability• Interest rate risk• Inflation risk• Systemic/non-systemic

Principle of Balance

• H&BU of residential sites will revert to commercial use as demand for condominium units weakens

• Result will be lower land prices in the CBD

DEVELOPMENT TREND OF NEW APARTMENTS

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1,000

2,000

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6,000

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YEAR

UN

ITS Absorption

Completion

Starts

Vacant

Profit

• Construction lenders see lower profits on gross sales to 5% from 10% - 15%

The Life Cycle of a Real Estate Investment

Product Characteristics Risk

Land No income, but high appreciation potential

High Risk

Development No income, but high income/appreciation potential

High Risk

Renovation Limited income, but higher appreciation

Higher Risk

Lease-Up Limited income, appreciation

Lower Risk

Operating Stage

Income and appreciation, depending upon market cycle

Lowest Risk

At What Point in the Market Cycle Do You Invest?

Recovery Rising Stable Declining

Discount Pricing Increasing pricing Highest pricing Decreasing pricing

Low occupancy Increasing occupancy

Full occupancy Declining occupancy

Flat rental rates Increasing rental rates

Maximum rental rates

Softer rental rates

Supply exceeds demand

Demand exceeds supply

Supply & demand in equilibrium

Over supply